We now have fiscal cliffs as far as the eye can see - mostly the result of the Federal Reserve and crony capitalism acting in a manner inimical to free markets and democracy. Both parties are responsible, beginning with LBJ's 'guns and butter' and continuing with every president since..(Reagan left the federal government barely 0.5% GDP smaller than Carter, while adding a massive structural deficit.) Bush II, per Stockman, jumped into the 'deep end' - the result of large tax cuts, funding two wars, adding an expensive prescription benefit to Medicare, and building up the military.
From 1880 to 1980, total public and private debt rarely exceeded 1.6X GDP; by 2008 it was 3.6X GDP. This massive growth was encouraged and made possible by the Federal Reserve, first under Alan Greenspan and now continuing with Ben Bernanke - digitally printing enormous amounts of money ($600 million/hour during Sept. 2008) to expand its balance sheet 6X to $3.2 trillion from $500 billion), lowering 'real' interest rates to below zero, deflecting efforts to address the 'Too Big to Fail' (TBTF) issue, endorsing a policy of spurring economic growth through the 'wealth effect' of rising stock prices (adding to its other goals of smoothing out the business cycle, minimizing inflation and unemployment, promoting home-ownership), supporting massive (and unnecessary bailouts), and institutionalizing the 'Greenspan put.'
Yet, during the 2000 - 2013 period, economic output grew by an average of 1.7%/year, the slowest since the Civil War, real business investment increased only 0.8%/year, and payroll job counts increased 0.1%/year. At the same time, the real new worth of the 'bottom' 90% has fallen one-fourth, the number of food stamp and disability aid recipients more than doubled. Thus, our Main Street economy is floundering while Washington piles soaring debt burdens on our descendants, unable to rein in either warfare or welfare states, or raise the taxes to pay our bills.
Stockman believes there never was even a remote threat of a Great Depression Redux - the Great Fear was purely a self-serving Wall Street concoction. The recent AIG bailout ($180 billion) was one of the most egregious examined by Stockman. He tells us its balance sheet at the time held $800 billion of mostly high-grade stocks/bonds, and its CD liabilities accounted for less than 10% of all liabilities. Congressional investigators found that the $400 billion (notational value) of busted CD insurance it underwrote was held by about 12 of the world's largest financial institutions, and virtually none by Main Street banks. The worst-case loss facing those giant institutions would have amounted to no more than a few month's bonus accruals against combined assets of $20 trillion, and each had the balance-sheet capacity to absorb an AIG hit. Goldman Sachs was the largest beneficiary paid full value (nearly $19 billion), $17 billion went to France's second largest bank, $15 billion to Deutsche Bank, $14 billion to Bank of America and Merrill Lynch, and nearly $10 billion to London-based Barclays.
Another rationale offered for bailing out AIG was to protect those individuals holding some of the $800 billion in insurance policies it held - first from a potential 'panic' run, and secondly from having those assets taken over by lawsuits over AIG's busted CD insurance. Stockman, however, says those assets would not have been subject to a 'panic' run, and policyholders were already protected by state insurance commission rules.
Bailing out the TBTF banks was rationalized as a means of protecting commercial, 'Main Street' banks. (I must admit to losing the chain of logic on this one.) Stockman, however, points out that those banks were mostly devoid of serious problems - their 4th quarter 2008 assets totaled $11.6 trillion, but only $200 billion (1.7%) were toxic. Commercial real estate loans accounted for most of the 500 bank closures conducted by the FDIC, and most of those loans were 'interest-only' with a 5 - 10 year maturity that would only have generated a slow bleed-off.
As for bailing out money market mutual funds, Stockman disagrees with that action also, pointing out that about half the $3.8 trillion was in funds exclusively invested in 'governments,' and they experienced no losses or liquidations. The other also held commercial paper, and during the several weeks after the Lehman failure about $430 billion 'fled,' triggered by one fund declaring it had 'broken the buck' because $750 million of its $60 billion assets was in Lehman paper (a loss of only 3%). Regardless, 85% of the flight money ($370 billion) simply moved to the 'government only' funds, and most of the remaining $60 billion went into CDs and other bank deposits, not under people's mattresses as feared.
G.E. was given $30 billion in taxpayer loans and guarantees to help it roll over its commercial paper and avoid the need to sell some assets at fire-sale prices or issue more stock. Again, unwarranted, per Stockman. Similarly with Goldman Sachs ($10 billion), which then generated $16 billion in salaries and bonuses atop $13 billion in net income for the year that began just 3 months later. Etc., etc. These bailouts rescued the perpetrators, but not the victims - per Stockman.
As for bailing out G.M. and Chrysler, Stockman contends those actions were also unnecessary - the jobs supposedly protected would simply have moved to existing plants in the Southeastern U.S. (Stockman also criticizes Romney for waffling on the topic, purportedly to help him win Ohio.)
Turning to the 'Greenspan/Bernanke Put,' Stockman recounts how Greenspan flooded Wall Street with money after the 10/1987 crash, and then the 1998 LTCM/Russian ruble collapse (LTCM had 30:1 leverage ratios). During the next 15 months, the S&P 500 rose 50% because Wall Street now believed errors would no longer be punished. Just before the dot-com bubble burst, the NASDAQ multiple reached a ridiculous P/E ratio of 100:1, about 6X its average historical level. Then, in response to a barely measurable GDP downturn in 2001, the Fed again flooded the market with more money - between early 2002 and mid-2005 the CPI increase averaged 2.5%/year, vs. short-term borrowings at 1.5%. Greenspan was now running a bubble machine; between 2002 and 2007, public and private debt grew $18 trillion, 5X the gain in GDP.
The Federal Reserve now holds up trillions of dollars worth of inflated asset prices via its destructive policies that it doesn't know how to unwind with creating another crash - domiciled in a monetary prison of its own making.
The bulk of 'The Great Deformation' is taken up with recounting how we got from the 'New Deal' to our current state of affairs.
Near the end, Stockman takes a few pages to also demolish a few currently popular myths, pointing out first that investors/entrepreneurs among the top 1% now have the lightest tax burden since Hoover and that the 2011 federal tax take of 15.2% GDP is as low as 1948 levels. He also contends there's not a bit of evidence to support the Laffer rationale for reducing current moderate marginal income tax rates, that half of personal consumption expenditure growth since 2007 has been funded by deficit-financed transfer payments - phony growth borrowed from future taxpayers. As for the supposed 'manufacturing Renaissance,' Stock says the real growth of manufacturing shipments from early fall 2000 to Sept. 2012 was only $200 billion in 2012 dollars, not the unadjusted $1.5 trillion commonly reported. All of 4%! Meanwhile, real defense goods growth in shipments increased 41% - obviously contributing significantly to the already anemic 4% total manufacturing growth, while producing nothing of economic value and creating new enemies.
As for Romney's 'business skills' - Stockman asserts Bain Capital garnered its winnings through leveraged speculation in financial markets perverted and deformed by money printing and Wall Street coddling. When he began in 1984, the S&P was at 160, and 1270 by early 1999. They were not rewards for capitalist creation, but mainly windfalls collected from gambling in markets rigged to rise. In fact, four of the ten Bain Capital home runs under Romney ended up in bankruptcy. Stockman makes this claim with confidence because he pursued this model as well.
Unfortunately, Stockman is not optimistic about the future. He sees CBO forecasts as overly rosy on wage and job growth, while also overestimating any decline in food stamps, unemployment, and other support programs. Our 2012 defense budget is 80% above Clinton's, in constant dollars, despite a 'peace' president. Meanwhile, the Fed has incited a global currency war. And then there's the matter of our skyrocketing health care costs.
The stock market is now where it was 13 years ago - meanwhile, we've only created 17,000 jobs/month vs. the 150,000 needed, we now have a cumulative current-account deficit of nearly $8 trillion, and the number of high-value jobs has shrunk.
Stockman predicts that within a few years the latest Wall Street bubble will explode, and the nation will enter an era of virulent political conflict, with no growth at all. His prescription - providing 100% public financing for candidates, limiting campaigns to eg. 8 weeks, a life prohibition on lobbying by anyone who has been on a legislative or executive branch payroll, restore and strengthen Glass-Steagall, abolish deposit insurance, impose a 30% tax on wealth, replace income taxes with consumption taxes, eliminate the massive bias in the tax doe for debt and capital gains, and mandating that Congress pass a balanced budget or face automatic sequester. Further, he would end the bailouts - much through Constitutional amendments.
Bottom-Line: Stockman's 'The Great Deformation' provides a lot of common sense, carefully analyzed facts, and a cold-dash of reality. Well worth reading.